The controversial Bay Delta Conservation Plan, if implemented, would spell disaster for California agriculture, says University of the Pacific economist Jeffrey Michael.

The massive, 40-foot in diameter twin water tunnels that are the reason more than $100 million has been spent on the BDCP plan could cost $67 billion, including interest on borrowed money, making the cost of any water the tunnels sent south of the Delta too costly for farming. Water for farming is the ostensible reason for the tunnels.

While it may have been a decent sounding project to the state’s water contractors when they started planning it back in 2006, the economics of the world have changed greatly since then, making it a huge financial risk, Mr. Michael told a recent meeting of the Solano County Board of Supervisors.

“So if these [water district] agencies are looking for good reasons to walk away form the project, I’ve given them a list of five,” he said.

Here they are:

• Construction cost estimates for the BDCP’s twin water tunnels have increased from $4 billion to $15 billion;

• Anticipated water exports have decreased from 6.5 million acre-feet to about 5 million acre-feet with no increase in the water supply;

• Seismic benefit estimates have declined substantially;

• Chances of federal and state funding now or in the future have severely declined;

• Urban water demand is declining and future population forecasts have dropped significantly.

“How much is this water going to cost?” Mr. Michael asked rhetorically. “Dr. Rodney Smith, a well known consulting economist who works with a lot of these water agencies, has expressed a lot of skepticism about the BDCP financing. Basically, he says, ‘I can’t tell you what the water will cost because no one will tell me what the yield of the product (twin tunnels) will be. It ranges from no extra water to best case scenario of 1.7 million acre feet of yield.’

“According to Dr. Smith, the best assumption is the water will cost over $500 an acre-foot to get it to Tracy. So that doesn’t work well for agriculture. If it doesn’t work well for agriculture, will it work for urban areas?”

That’s when Mr. Michael told about his experience appearing at Assemblyman Jim Frazier’s economic accountability hearing on the BDCP project February 12 and interacting with Dennis Cushman, assistant general manager of the San Diego Water Authority. Mr. Cushman told how they would have to pay $1.1 to $1.2 billion and that the “optimistic yield scenario” would be about 76,000 acre-feet.

So, although they have not opted out of the $67 billion BDCP twin tunnels yet, they opted to spend about $1 billion to build a desalination plant in Carlsbad that is guaranteed to produce 56,000 acre feet of purified water every year. “Basically, they said that the (BDCP) deal can not get any worse for us and keep us in,” said Mr. Michael.

“The product is designed as a very marginal product for urban areas and there has to be a lot of shifting of costs from agriculture users to urban users to make it work,” Mr. Michael said. “The financial plan is a mess. They still don’t have one after seven or eight years. The BDCP is counting on two or more water bonds to pass to finance the habitat.”

Risk Reduction – For Whom?

The UOP economist, who is the director of the university’s Business Forecasting Center, said that when BDCP’s supporters talk about risk reduction, they are talking about a select minority, not all users of water from the Delta, let alone all Californians.

“My view is most of the BDCP is reducing risk for the junior water rights holders that are customers of the projects and the State Water Project under the Department of Water Resources and increasing the risks to other users in that process. And that’s pretty important,” he said.

California water rights have been shaped by 150 years of legislation, litigation and violence. “Junior” water rights are much like the term would suggest – other rights holders have more say on getting water. Many of those getting water from the State Water Project and the federal Central Valley Project are junior rights holders.

Mr. Michael said if the Sacramento-San Joaquin Delta needs more water, it would have to come from somebody else, which increases the risk to upstream users and taxpayers. “All this stuff needs to be accounted for from a state wide perspective,” he said.

“Another reason they [the water contractors] are worried is this big flood scenario. I have no idea what the probabilities are for that. In the Delta there are a lot of stakeholders who have an interest in flood control and integrity of those levees. It’s not risk reduction. It’s risk shifting. Be clear about that. The BDCP’s approach to risk reduction is to create an individual solution to take them out of the puzzle and leave everyone else on their own. If you take the water exporters out of the picture, indeed you’ll have less people there to share the common burden of that flood controls system.”

Regarding other parts of the BDCP package, he said the state “doesn’t have to build the tunnels to have that ‘stuff.’ It’s not being financed by the water exporters. It is being financed by bonds and the people of California. The BDCP — whether it is in the EIR [environmental impact report] or in their benefit cost analysis, in my view, shouldn’t be counted as benefits from habitat projects that aren’t financed by the proponents that can be reasonably expected to go forward within the tunnels. Those should be part of the baseline. If the state follows the 2009 Delta Reform Act, it says they have to achieve these co-equal goals, but doesn’t say only if we have a BDCP With or without the tunnels, they have to achieve that stuff. That is the proper baseline.”

He said in economics, if you want to make a project look good, you set up a weak alternative. “Another issue is evaluating environment,” Mr. Michael continued. “This is a sticky issue to do in economics.” He said he found an error in the BDCP: “Once it starts talking about environmental benefits of BDCP, it switches back to the EIR baseline.”

“I submitted those comments to the author of the report. They said they were going to correct the errors, but I haven’t seen a revised report yet.”

Mr. Michael also said there are “lots of optimistic assumptions” about construction by the BDCP — like no delays and everything happening on time. Nor have they factored in that San Diego’s Carlsbad desalinization plant will be on line by 2016, or other technological improvements that will happen in the next 50 years.

“I don’t think anybody that has an interest in California agriculture in the Delta or south of the Delta should be excited about the BDCP,” said Mr. Michael.

About Jeffrey Michael:

Mr. Michael received his Ph.D. from North Carolina State University. His areas of expertise include regional economic forecasting and environmental economics including work on the economic impacts of the Endangered Species Act, climate change, and regulation on land use, property values and employment growth.

He has been published in scholarly journals such as the Journal of Law and Economics, Southern Economic Journal, Energy Policy, and Ecological Economics.

Mr. Michael makes frequent presentations to the regional business and government audiences, and is cited over 200 times per year in the local and national press including the Wall Street Journal, New York Times Magazine, Los Angeles Times, San Francisco Chronicle, Newsweek, National Geographic, Washington Post, NPR, and PBS.

Before coming to Pacific in 2008, he spent nine years as faculty, associate dean, and director of the Center for Applied Business and Economic Research at Towson University in Maryland.

You can watch Jeffrey Michael give much more detail in his June remarks to the Solano County Board of Supervisors in the following video: